A Look Ahead to Earnings in the Banking Space

Brian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

After a year where financials greatly outperformed the market, the industry took a hit on Friday after Wells Fargo’s (NYSE: WFC) earnings sparked fear. The $185 billion company lost 0.85% of its value after trending higher throughout the day. However, despite its earnings beating both top and bottom line expectations there were some concerns within the report. And now, looking ahead, most of the largest banks in the market will be reporting earnings during this upcoming week.

Wells Fargo Reports a Solid Quarter

During the last year, if the market was flat, negative, or trading with a gain, the large banks almost always outperformed the S&P 500. These banks were recovering from losses and strong selling pressure that crippled the industry back in 2011. However, last week, investors were a little more cautious as the stocks were flat or lower before earnings.

So why might investors be spooked ahead of this current week? There are three answers to this question: 1) large gains over the last year, 2) Wells Fargo showed some weakness, and 3) almost all of the large banks will announce earnings this week. Wells Fargo is considered by many to be one of the top two or three banks in the entire country, therefore investors were quick to make assumptions and dissect every number on the company’s earnings report.

For the fourth quarter, Wells Fargo posted an EPS of $0.91 (a $0.02 beat) and revenue of $21.90 billion ($600 million more than expectations). The earnings report looks solid, with a 7% rise in revenue year-over-year, however dissection is the key and investors broke down the entire quarter.

The main concerns from Wells Fargo’s earnings may have been in regards to margins and future growth. The company’s net interest income declined 2% over last year to $249 million due to a 10 basis point decline; 3.56% in net interest margins. Furthermore, the company disclosed that its portion of the foreclosure settlement pie is right around $766 million. Yet despite this charge, the company still has a lot of money on its balance sheet, and investors fear that it has nowhere to profitably invest due to a potentially slowing mortgage lending business.

A Busy Week Ahead

As you can see, the top and bottom lines were positive, but the details and fine print created some concern. Now, we prepare for a weak where eight large banks will announce earnings. Take a look at the chart below for dates and EPS expectations.

<table> <tbody> <tr> <td> <p><em>Company</em></p> </td> <td> <p><em>Earnings</em></p> </td> <td> <p><em>Expectations (EPS)</em></p> </td> </tr> <tr> <td> <p><strong>JPMorgan</strong></p> </td> <td> <p>Wednesday</p> </td> <td> <p>$1.17</p> </td> </tr> <tr> <td> <p><strong>Goldman Sachs</strong></p> </td> <td> <p>Wednesday</p> </td> <td> <p>$3.66</p> </td> </tr> <tr> <td> <p><strong>Bank of America</strong></p> </td> <td> <p>Thursday</p> </td> <td> <p>$0.02</p> </td> </tr> <tr> <td> <p><strong>Citigroup</strong></p> </td> <td> <p>Thursday</p> </td> <td> <p>$0.96</p> </td> </tr> <tr> <td> <p><strong>Morgan Stanley</strong></p> </td> <td> <p>Friday</p> </td> <td> <p>$0.29</p> </td> </tr> <tr> <td> <p><strong>BB&T Corporation</strong></p> </td> <td> <p>Thursday</p> </td> <td> <p>$0.71</p> </td> </tr> <tr> <td> <p><strong>Fifth-Third</strong></p> </td> <td> <p>Thursday</p> </td> <td> <p>$0.71</p> </td> </tr> <tr> <td> <p><strong>U.S. Bancorp </strong></p> </td> <td> <p>Wednesday</p> </td> <td> <p>$0.74</p> </td> </tr> </tbody> </table>

All of these companies will be closely monitored, especially those that announce on Wednesday, however none more so than Bank of America (NYSE: BAC). BofA has been the best-performing of the bunch, and is also the most controversial bank in America. The stock has doubled since the start of 2012 and has been sued more than any other company. Investors will now be curious to see how the combination of lawsuits, a rising housing market, and job cuts will affect its fundamentals. Seeing as how the company announces earnings on Thursday it will most likely be affected by JPMorgan, but I have no doubt that BofA will be the most closely monitored of the banks.

Watch BBT for Great Performance

While all eyes will be on Bank of America, and American Express, to determine the overall strength of the sector, the best fundamental company will also be announcing its quarterly results. On Thursday, BB&T (NYSE: BBT) will report earnings, and is expected to earn $0.71. If the company meets expectations it would be a rise of 35% year-over-year.

BB&T is the fastest growing of the larger banks with industry leading margins, but is also one of the cheapest. This is a company that is growing by double digits yet trades with a forward P/E ratio of under 10.50.  The company operates in a very strong region, and due to a recent surge in stock performance, I think that BBT is a stock-to-watch next week as a clear cut favorite that could rise.  

Conclusion

Remember, Wells Fargo beat its top and bottom line expectations, and expectations have been significantly lowered for the banking industry. This is a space that has traded considerably higher, but is still cheap with almost all of these stocks trading below or equal to their book value per share. Last quarter, Wells Fargo also beat expectations and fell lower, but then as other large banks announced earnings the entire space then rallied to trade higher. As a result, with expectations and valuations being so low, I’d watch for a similar trend, and for strong gains in the financial sector over the next week.


BrianNichols is Long BBT.  The Motley Fool recommends Wells Fargo & Company. The Motley Fool owns shares of Bank of America and Wells Fargo & Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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